Proposed Brazilian Fiscal System for Pre-Salt Production Projects: A Comparative Study of Gain and Loss of Government and Companies

Abstract

Abstract After the discovery of large oil reserves in pre-salt areas of Santos Basin, the Brazilian government has changed the fiscal regime from royalty/tax system to production sharing system, which is the one already adopted in countries like Indonesia, Colombia, among others. The proponents of this idea say that it is necessary, because after these discoveries the exploration risk in this area is low. The proposed fiscal regime has created an intense debate among professionals, institutions and government. Who will be the winner? Who will be the looser? How much will be the loss or gain? At this moment, there is not clear convergence of viewpoint about the forecasting of the impacts on new investment. The reason for the implementation of production sharing system is because government wishes to capture a larger share of the profits. How? Politicians believe that the following policy could bring more benefits to government: in the bidding to new productions projects, the winner will be the company that offers the largest share of production to government. Then, the main objective of this paper is to investigate the behavior of the proposed fiscal regime in terms of production profile, NPV and risk, etc. In order to carry out this study, first, a typical oil field project from the pre-salt area is selected, whose characteristics are: large reserve, located in deep-water and bellow salt layer. After that, it is carried out an economic evaluation, comparison and risk analysis of a production strategy considering both regimes of concession and production-sharing. It is concluded that, it is not always that production-sharing agreement is superior, since it depends on the share of government in production, investment level, operation cost, among others.